The law of supply and demand influences more than just how to price products. It also informs how to accurately allocate products among a company’s various points of sale, both online and offline. Get it right, and the results will show in boosted sales revenue and more repeat customers. Miscalculations can cost a company, leading to lower sales, lost customers and unnecessary storage and shipping expenses. As a business grows and expands, it becomes increasingly important to manage the product allocation process with software that provides real-time visibility across the entire distribution network.
What Is Product Allocation?
Product allocation is an important part of inventory management, focused on matching product supply with product demand to fulfill customer orders as efficiently as possible. From a business standpoint, proper allocation can reduce the likelihood of overordering or underordering, either of which can hurt revenue. Determining where and how much product to allocate to different locations and online sales channels is typically based on a combination of data-driven factors, including historical customer data, demand forecasting and seasonal trends.
- Product allocation is an inventory management process that aims to strategically distribute finished products across points of sale to meet demand, increase customer satisfaction and maximize sales.
- Products are typically allocated across a company’s distribution channels one of three ways: equally, following trends or seasonally.
- Decisions about product allocation tend to be best when informed by demand-planning data that factors in how much customers have bought in the past, combined with sales forecasts and additional information.
- Many of the challenges related to product allocation can be resolved with software that monitors inventory levels across a business’s entire distribution network.
Product Allocation Explained
The goal of product allocation is to make sure that enough goods are on hand when and where they’re needed so that customers can buy what they want and a business can profit. Product allocation involves the strategic distribution, tracking and management of products across a business’s network of ecommerce fulfillment centers, storage facilities and brick-and-mortar stores.
Perhaps most critical during times of product shortages and rationing — which has been the case with gasoline, toilet paper and, most recently, baby formula — product allocation is also a daily concern among growing businesses that are more sensitive to the financial losses associated with the inability to meet customer demand.
Why Is Product Allocation Important?
Product allocation is part of the inventory management process, with the mandate to ensure all points of sale are adequately stocked with the right amount of items to meet demand. Any time a customer is ready to buy a product but faces an empty shelf or “temporarily unavailable” message on a website, the business loses a sale and possibly the customer, who may leave and look for the item elsewhere. Well-managed product allocation also minimizes the cost and number of days it takes to ship products — another way to satisfy customers and rise above the competition.
Properly allocating products throughout a business’s myriad sales points — such as retail stores, fulfillment centers, warehouses, drop-shippers, popup shops and third-party logistics providers — decreases the risk of running out of products, which is known as stockouts, or ordering too many products that go unsold, which is called dead stock. That’s key because excess products can take away precious shelf space from other products. Product allocation can also cut down on storage costs resulting from having too many products or, conversely, reduce empty, wasted storage space when companies don’t have enough products.
3 Types of Product Allocation Strategies
Naturally, how a company chooses to allocate its products will be tailored to its specific products and needs. Companies tend to use one of three strategies:
- Equal allocation distributes the same amount of a product to every point of sale. It is also known as universal allocation and is the most commonly used strategy for growing businesses that may not have a large quantity or variety of products, or are just starting out and lack the sales history or data to accurately forecast demand.
- Trend allocation distributes products based on where they are most popular and selling quickly. For example, fashion trends often begin in California. Following trend allocation, a retailer would be more inclined to allocate most of its fashion-forward apparel near the West Coast until the trend becomes popular in other parts of the country.
- Seasonal allocation distributes products based on weather conditions. For example, a national sporting goods retailer would store the bulk of its surfing gear in stores and distribution centers close to the West Coast, whereas most of its snowboarding equipment would be allocated across the northern portion of the country.
Benefits of Product Allocation
Done right, a business that accurately allocates products across its distribution network and sales channels will see many benefits. For example, effective product allocation can:
Having the right levels of stock allocated to the correct places maximizes sales, which in turn increases revenue and improves cash flow.
Overordering can lead to dead stock, which is excess inventory that doesn’t sell. Businesses must often resort to discounting unsold products in an attempt to at least break even. Losses extend beyond the unsold products and include storage carrying costs, as well as less space for other revenue-generating products.
A stockout occurs when a business runs out of a product and is unable to meet customer demand. Every missed sale represents a financial loss. Backorders — assuming a customer is willing to wait for the product to come back in stock — can chip into a business’s profit margins, since companies will often incur extra costs from paying expedited shipping fees in an effort to reward customers for their willingness to wait.
Reduce shipping costs and transit time:
It stands to reason that shipping costs and lead times are higher when an order has to travel a great distance to reach the customer. By allocating products to stores and distribution centers located close to where they’re most in demand, businesses often pay less and can charge customers less for shipping, and products can reach their destinations more quickly. This can also provide a company with a competitive edge.
Improve the customer experience:
Customers who visit a business’s store or website, find exactly what they need and take the products home or receive their shipments when promised are happy customers who are likely to return. They are also more apt to leave a good review or recommend a company to a friend.
The ability to match supply to demand also applies to product manufacturers, which need to align and allocate the right amount of inventory, such as raw materials, components and unfinished goods, across their production facilities.
Drawbacks of Product Allocation
Product allocation is not without some challenges, although software can overcome them. (More on that topic soon.) Among the scenarios that may impact product allocation are:
A spike in demand.
Even the best prognosticators can’t predict when some products will take off. In the early 1980s, for example, toy stores found themselves overrun by customers desperate — some might say crazed(opens in new tab) — to buy suddenly popular Cabbage Patch dolls for their children. Having safety stock on hand to avoid a stockout can help carry the business over until additional products arrive, though how much to keep on hand as backup has to be balanced against related carrying costs. Products can also be reallocated from one location to another if the spike is contained to a specific area.
Like a spike in demand, a sudden drop in supply can quickly clear inventory. Many circumstances can lead to product shortages — including, for example, supply-chain issues related to the COVID-19 pandemic — and many of these factors are out of a business’s control. Again, safety stock and reallocation may help. Other times a business may choose to limit how many products customers can buy at one time to better spread the wealth.
Mistakes in product allocation often stem from decision-making based on inaccurate or outdated data about inventory levels and anticipated demand. Automated, real-time inventory management software can keep stock levels transparent, accessible and accurate everywhere from the largest warehouse to a corner of the smallest shelf.
3 Product Allocation Best Practices
There is no one way to determine product allocation. Each business also has its own requirements and restrictions. What’s more, factors beyond its control, such as a product shortage or weather event like a hurricane, can shake up the most thought-out strategy. Nevertheless, businesses can draw on the following trio of best practices when determining product allocation:
Lean on demand data:
Demand planning combines sales forecasts with historical sales data, consumer trends and seasonal information to help determine optimal inventory levels, whether across multiple distribution points or even just one shop. To be most effective, demand planning should be an ongoing process based on the analysis of real-time data. For companies just starting out, researching how similar products have performed in their industries can help predict initial demand.
Continually monitor inventory levels:
A constant eye on inventory levels helps ensure that enough supply is available to meet customer demand and determine whether any reallocation is necessary. It’s also important further up the supply chain, since an inventory count can signal when more products need to be produced or production should be paused.
Automate with inventory management software:
As a business grows and expands, manually tracking inventory becomes less practical and increasingly prone to error. Leading inventory management software automatically tracks product levels in real time across multiple sales points and channels to ensure product availability and proper allocation.
Requirements for Product Allocation
The moment a business upgrades from a single point of sale, it becomes time to consider how to allocate products in accordance with demand. This ability requires thorough, real-time visibility into and tracking of inventory levels.
But product allocation doesn’t work in a bubble. A supply of beach chairs could be running low in a New York-based fulfillment center, but if it’s mid-September, does it make sense to replenish inventory? The answer can best be determined by demand-planning software that estimates inventory needs based on historical data — perhaps it was still “beach weather” through October for the past three years — combined with sales forecasts and other data. Sophisticated inventory management software will include these capabilities and more, optimizing inventory levels so that supply matches demand.
Bolster Product Allocation & Meet Customer Demand With NetSuite
Decisions about product allocation are most accurate when based on real-time intelligence viewed in the context of past and forecasted data. NetSuite Inventory Management answers the call. The software provides complete visibility into product levels across every location a company sells its inventory. As a result, the company can proactively monitor its stock levels to ensure product availability matches customer demand — maximizing revenue potential without the worry of financial losses due to understocking or overstocking. NetSuite Inventory Management sends real-time alerts should product levels fall below a predefined threshold, automates the replenishment process and assists with demand planning.
The concept of product allocation is simple: Match product supply to customer demand. Its execution, however, is a bit more complicated, especially as a business grows and expands its footprint through multiple locations and online sales channels. But by following a few best practices, combined with feature-rich inventory management software, businesses can stay on top of their inventory levels and weather unforeseen changes in the market — all of which leads to higher revenue and more satisfied, loyal customers.
Product Allocation FAQs
Why is a product on allocation?
Product allocation is the process of distributing the right amount of products to be sold among a company’s multiple locations, such as retail stores and fulfillment centers, to match customer demand. Inventory tracking and monitoring are also integral to the process.
What are the features of product allocation?
The goal of product allocation is to make sure enough goods are available when and where they are needed so customers can buy what they want and a business can profit. This involves the strategic distribution, tracking and management of products across a business’s network of ecommerce fulfillment centers, storage facilities and stores.
What are the three types of product allocation strategies?
Product allocation works best when tailored to a company’s specific products and needs. Generally speaking, business owners and inventory management teams typically use three common strategies. Equal allocation, also known as universal allocation, distributes the same amount of a product to every point of sale. Trend allocation distributes products based on where they are most popular and selling the fastest. Seasonal allocation distributes products based on weather conditions in a certain area during a particular time of year.
What does allocation mean in manufacturing?
In manufacturing, allocation means requesting parts and stocking the right amount of materials — such as raw materials, components and unfinished goods — in the appropriate facilities in advance of product production.